Tag: tools for financial analysis

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Questions Related to tools for financial analysis

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Real rate of return is equal to__________.

  1. Nominal Rate x Inflation Rate

  2. Nominal Rate $\div$ Inflation Rate

  3. Nominal Rate - Inflation Rate

  4. Nominal Rate + Inflation Rate
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The real rate of return formula is the sum of one plus the nominal rate divided by the sum of one plus the inflation rate which then is subtracted by one. The formula for the real rate of return can be used to determine the effective return on an investment after adjusting for inflation.

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Risk in capital budgeting implies that the decision-maker knows _______ of the cash flows.

  1. Variability

  2. Probability

  3. Certainty

  4. None of the Above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Risk is the probability of damage, loss or threat. Risk in capital budgeting implies that the decision maker knows the probability of cash flows. The decision maker after analysing the risk will have of fair idea of the cash flows that might arise from the decision that is made. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

A proposal is not a capital budgeting proposal if it____________.

  1. Is related to fixed assets

  2. Brings long-term benefits

  3. Brings short-term benefits Only

  4. Has very large investment
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A proposal is not a capital budgeting proposal if it brings short-term benefits only. Capital budgeting decisions involve huge funds and are long term decisions, it benefits the firm in long term. As they involve huge costs one wrong decision would have a big effect on the business.

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Profitability Index, when applied to Divisible Projects, impliedly assumes that_____________.

  1. Project cannot be taken in parts

  2. NPV is linearly proportionate to part of the project taken up

  3. NPV is additive in nature

  4. Both B and C
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Profitability index is an index that identifies the relationship between cost and profitability of a project. Profitability Index. when applied to divisible projects impliedly assumes that project cannot be taken in parts has to be accepted fully, NPV is linearly proportionate to part of the project taken up and NPV is additive in nature. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Evaluation of capital budgeting proposals is based on cash flows because_____________.

  1. Cash rows are easy to calculate

  2. Cash flows are suggested by SEBI

  3. Cash is more important than profit

  4. None of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Capital budgeting is based on cash flows because there is discounting and other factors used which can be done only on cash. Moreover, cash can be spent and not profit. Cash is more important than profit as the company has to focus on many costs. As in the long run the company will succeed if it focuses mote on cash flow statement. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

NPV of a proposal, as calculated under Risk Adjusted Discount Rate(RADR) & Real Certainty Equivalent(CE) Approach will be __________.

  1. Same

  2. Unequal

  3. Both A and B

  4. None of A and B
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The Risk Adjusted Discount Rate (RADR) and Certainty Equivalent (CE) approaches are different methods for incorporating risk into capital budgeting. They generally yield different NPV results because they adjust for risk in different ways.

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

What factors increase the riskiness of  a Capital budgeting Project?

  1. Industry specific risk factors

  2. Competition risk factors

  3. Project specific risk factors

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The factors that increase riskiness of a capital budgeting project are industry specific risk, competition risk and project risk. Industry specific risk/market risk are the risks that might occur due to change in the industry, competition risks are the risk that can occur because of the competitors strategy and lastlyt project risk are the risk that are associated with the project as whether or not the project will be profitable or not. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

Risk-aversion of an investor can be measured by______________.

  1. Market Rate of Return

  2. Risk-free Rate of Return

  3. Portfolio Return

  4. None of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Risk aversion means the tendency of a person to avoid a decision/investment when there is risk involved. Risk aversion is a personal trait of a person. Risk-aversion of an investor cannot be measured by market rate of return, risk free rate of return or portfolio profit. 

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

For calculating trend percentage, which of the following formula is used? 

  1. (Present year value/Base year value) x 100

  2. (Base year value/Present year value) x 100

  3. (Present year value/100) x Base year value

  4. (Base year value/100) x Present year value
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Generally the first year is taken as the base year. The figure of base year is taken as 100. Trend percentage is calculated by following formula:

(Present year value/Base year value) x 100

Multiple choice trend analysis tools for financial analysis analysis of financial statements financial statement analysis accountancy

The most commonly used tools for financial analysis are _______________.

  1. Horizontal analysis

  2. Vertical analysis

  3. Ratio analysis

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Commonly used tools of financial analysis are: Comparative statements, Common size statements, trend analysis, ratio analysis, funds flow analysis, and cash flow analysis.